EHTC Tax Adviser TAX AND FINANCIAL STRATEGIES. In this issue: Nine Smart Year-End Tax Planning Strategies for Individuals

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1 EHTC CPAs & Business Consultants 2013 Tax Adviser TAX AND FINANCIAL STRATEGIES In this issue: Nine Smart Year-End Tax Planning Strategies for Individuals How Much Will Social Security Recipients Collect Monthly in 2014? New Tax Laws in Effect IRS Announces 2014 Pension Plan Amounts Five Year-End Tax-Saving Strategies for Small Business Newsletter published by: Echelbarger, Himebaugh, Tamm & Co., P.C Cascade Rd. SE, Ste. 2A, Grand Rapids, MI / info@ehtc.com /

2 Nine Smart Year-End Tax Planning Strategies for Individuals Tax planning can be critical at the end of the year. Here are some new ideas to contemplate, along with tried-and-true year-end tax-saving techniques. 1. Game the Standard Deduction If your total annual itemized deductions are usually close to the standard deduction amount, consider the strategy of bunching together expenditures for itemized deduction items every other year. Itemize in those years to deduct more than the standard deduction figure. Then, claim the standard deduction in the intervening years. Over time, this can save hundreds or even thousands in taxes by increasing your cumulative write-offs. That s because you ll bag higher itemized deductions in alternating years and relatively generous standard deductions in the other years. So regardless of what happens with tax rates, you ll come out ahead. The table below shows the standard deduction amounts for 2013 and the estimated amounts for Standard Deduction Filing Status Single $6,100 $6,200 Married Joint Filer $12,200 $12,400 Head of Household $8,950 $9, Prepay Deductible Expenditures if You Itemize If you itemize deductions, it makes sense to accelerate some deductible expenditures into this year to produce higher 2013 write-offs if you expect to be in the same or lower tax bracket next year. See the table at the end of this article for the estimated 2014 federal income tax brackets. drill with a vacation home. However, if you prepay this year, you ll have to continue the policy for next year and beyond. Otherwise, you ll have only 11 month s worth of interest in the first year you stop. Next up on the prepayment menu are state and local income and property taxes that are due early next year. Prepaying those bills before the end of the year can decrease your 2013 federal income tax bill, because your itemized deductions total will be that much higher. Consider prepaying expenses that are subject to deduction limits based on your AGI. The two prime candidates are medical expenses and miscellaneous itemized deductions. For 2013, medical costs are deductible only to the extent they exceed 10% of AGI for most people. However, if you or your spouse will be age 65 or older as of year-end, the deduction threshold is a more-manageable 7.5% of AGI. Miscellaneous deductions (for investment expenses, job-hunting expenses, fees for tax preparation and advice, and unreimbursed employee business expenses) count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into a single calendar year, you ll have a fighting chance of clearing the 2% of AGI hurdle and getting some tax savings. Warning: Prepayment can be a bad idea if you owe the alternative minimum tax (AMT) for this year. That s because write-offs for state and local income and property taxes are completely disallowed under the AMT rules and so are miscellaneous itemized deductions. Therefore, prepaying these expenses may do little or no tax-saving good for AMT victims. Your tax adviser can tell you if you are in the AMT mode. 3. Estimated Tax Planning As a result of recent tax increases, some taxpayers quarterly estimated tax liabilities may not be sufficient. Tax planning is imperative to ensure that your estimated tax liability is accurate and to avoid any penalties that may be imposed if your quarterly estimated tax liability is not accurate. Furthermore, tax planning is necessary to give you peace of mind come April We will be able to take into account your family s financial situation, the new five dimensional tax system, and any tax planning strategies to provide you an up-to-date 2013 expected tax liability. Lastly, a plan needs to be put in to place concerning your state tax liability. Depending on your family s financial situation and when you pay your state taxes, we may be able to reduce your federal tax payable, including the Alternative Minimum Tax. Perhaps the easiest deductible expense to prepay is included in the house payment due on January 1. Accelerating that payment into this year will give you 13 month s worth of deductible interest in You can use the same prepayment 1.

3 4. Prepay College Tuition Bills If your 2013 AGI allows you to qualify for the American Opportunity college credit (maximum of $2,500) or the Lifetime Learning higher education credit (maximum of $2,000), consider prepaying college tuition bills that are not due until early 2014 if it would result in a bigger credit on this year s Form Specifically, you can claim a 2013 credit based on prepaying tuition for academic periods that begin in January through March of next year. The American Opportunity credit is phased out (reduced or completely eliminated) if your modified adjusted gross income (MAGI) is too high. The phase-out range for unmarried individuals is between MAGI of $80,000 and $90,000. The range for married joint filers is between MAGI of $160,000 and $180,000. MAGI means regular AGI, from the last line on page 1 of your Form 1040, increased by certain tax-exempt income from outside the U.S. which you may not have. Like the American Opportunity credit, the Lifetime Learning credit is also phased out if your MAGI is too high. However, the Lifetime Learning credit phase-out ranges are much lower, which means they are much more likely to affect you. The 2013 phaseout range for unmarried individuals is between MAGI of $53,000 and $63,000. The 2013 range for married joint filers is between MAGI of $107,000 and $127,000. If your MAGI is too high to be eligible for the Lifetime Learning credit, you might still qualify to deduct up to $2,000 or $4,000 of college tuition costs. If so, consider prepaying tuition bills that are not due until early 2014 if that would result in a bigger deduction on this year s Form As with the credits, your 2013 deduction can be based on prepaying tuition for academic periods that begin in the first three months of Consider Deferring Income It may also pay to defer some taxable income from this year into next year if you expect to be in the same or lower tax bracket in 2014 (see the table at the end of this article for the 2014 brackets). For example, if you re in business for yourself and a cashmethod taxpayer, you can postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won t receive payment for them until early You can also defer taxable income by accelerating some deductible business expenditures into this year. Both moves will postpone taxable income from this year until next year. Deferring income can also be helpful if you re affected by unfavorable phase-out rules that reduce or eliminate various tax breaks (the child tax credit, the two higher-education tax credits, and so on). By deferring income every other year, you may be able to take more advantage of these breaks every other year. 6. Sell Loser Stocks Held in Taxable Accounts Selling losing investments held in taxable brokerage firm accounts can lower your 2013 tax bill because you can deduct the resulting capital losses against capital gains from earlier in the year. If your losses exceed your gains, you will have a net capital loss. You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) against ordinary income from salary, self-employment activities, alimony, interest, or whatever. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2014 and beyond. 7. Set Up Loved Ones to Pay 0% on Investment Income For 2013, the federal income tax rate on long-term capital gains and qualified dividends is still 0% for gains and dividends that fall within the 10% or 15% rate brackets. While your tax bracket may be too high to take advantage of the 0% rate, you probably have loved ones who are in the bottom two brackets. Consider giving these individuals appreciated stock or mutual fund shares. They can sell the shares and pay no tax on the resulting long-term gains. Remember: their gains will be long-term as long as your ownership period plus the gift recipient s ownership period equals at least a year and a day. Giving away dividend-paying stocks is another bright tax idea. As long as the dividends fall within the gift recipient s 10% or 15% rate bracket, they will qualify for the 0% federal income tax rate. However, be aware that if you give away assets worth over $14,000 during 2013 to an individual gift recipient, it will reduce your $5.25 million unified federal gift and estate tax exemption. However, you and your spouse can together give away up to $28,000 without reducing your respective exemptions. 2.

4 Warning: If your gift recipient is under age 24, the Kiddie Tax rules could potentially cause some of his or her capital gains and dividends to be taxed at the parent s higher rates. That would defeat the purpose. Contact your tax adviser if you have questions about the Kiddie Tax. 8. Convert a Traditional IRA into a Roth IRA The best scenario for this strategy is when you expect to be in the same or higher tax bracket during retirement. There is a current tax cost for converting because a Roth conversion is treated as a taxable liquidation of your traditional IRA followed by a non-deductible contribution to the new Roth account. After the conversion, all the income and gains that accumulate in the Roth account, and all withdrawals, will be free from federal income tax, assuming they are qualified withdrawals. In general, qualified withdrawals are those taken after: You have had at least one Roth account open for more than five years; and You ve reached age 59 1/2. With qualified withdrawals, you avoid having to pay higher tax rates that may apply during your retirement years. While the current tax hit from a Roth conversion is unwelcome, it could be an acceptable price to pay for the future tax savings. If the Roth conversion idea sounds appealing, contact your tax adviser for a full analysis of all the relevant variables. Sell loser investments and donate cash. On the other hand, don t donate loser stocks. Sell them, book the resulting capital loss, and give away the cash sales proceeds. That way, you can generally write off the full amount of the cash donation while keeping the tax-saving capital loss for yourself. Warning: You must itemize deductions to gain any tax-saving benefit from charitable donations, except for donations out of an IRA, as explained immediately below. Make charitable donations out of your IRA. For 2013, you can make up to $100,000 in cash donations to IRS-approved charities directly out of your IRA, if you ll be age 70 1/2 or older by year end. Such direct-from-ira donations are called qualified charitable distributions, or QCDs. Donations made in this fashion don t directly affect your tax bill because QCDs are tax-free and no deductions are allowed for them. However, QCDs count as withdrawals for purposes of meeting the required minimum distribution (RMD) rules that apply to traditional IRAs. Therefore, taxes can be avoided by arranging for tax-free QCDs in place of taxable RMDs. If your spouse owns one or more IRAs and is over age 70 1/2, he or she is entitled to a separate $100,000 QCD privilege for The key to taking advantage of the tax-saving moves is to act before the end of the year. This article only outlines some strategies that might be available. Consult with your EHTC tax adviser regarding your situation. Tax Rates for 2014 Income Tax Bracket Single Married Filing Jointly Head of Household 10% $0-9,075 $0-18,150 $0-12,950 Beginning of 15% $9,076 $18,151 $12,951 Beginning of 25% $36,901 $73,801 $49, Give to Charity If you have charitable inclinations, here are three suggestions. Donate appreciated stock to charity. If you have appreciated stock or mutual fund shares (currently worth more than what you paid) that you ve owned for more than a year, consider donating them to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit. Beginning of 28% $89,351 $148,851 $127,551 Beginning of 33% $186,351 $226,851 $206,601 Beginning of 35% $405,101 $405,101 $405,101 Beginning of 39.6% $406,751 $457,601 $432,201 3.

5 How Much Will Social Security Recipients Collect Monthly in 2014? Monthly Social Security and Supplemental Security Income (SSI) benefits for nearly 63 million Americans will increase just 1.5% in 2014, the federal government announced. The 1.5% cost-of-living adjustment (COLA) will begin with benefits that more than 57 million Social Security beneficiaries will receive in January The purpose of the COLA, the Social Security Administration explained, is to ensure that the purchasing power of benefits is not eroded by inflation. The COLA is based on inflation changes as measured by the Consumer Price Index. The AARP stated that the new COLA, at an average of $19 a month, will quickly be consumed by the rising costs of basic needs like food, utilities and health care. Estimated Average Monthly Social Security Benefits Type of Benefit or Family Before 1.5% COLA After 1.5% COLA Increase Benefit All retired workers $1,275 $1,294 $19 Type All disabled workers $1,129 $1,146 $17 Family Disabled worker, $1,914 $1,943 $29 Type spouse and children Retired worker and $2,080 $2,111 $31 aged spouse Surviving child or $1,043 $1,059 $16 children only* Aged widow or $1,225 $1,243 $18 widowere alone Widowed mother and 2 chidren $2,585 $2,624 $39 Note: The above estimates are based on actual benefit data through October 2013.*Family with one or more children excludes surviving parent or guardian who is ineligible to receive benefits. Source: Social Security Administration New Tax Laws in Effect High-income individuals will likely pay more in taxes under the new law and should consider options for minimizing their burden. The highest individual income tax rate rose to 39.6% in 2013 and taxpayers at this income level also saw the dividend and long-term capital gains tax rates rise from 15% to 20%. In addition, the new 3.8% net investment income tax applies to single taxpayers with adjusted gross income of $200,000 and joint filers earning $250,000. This new tax may affect the effective after-tax return on the sale of your investments, but proper planning may serve to minimize the impact. Although the alternative minimum tax (AMT) originally was aimed at high-income taxpayers, it increasingly has affected more and more middle-income taxpayers over the years. The law indexed the AMT for inflation but the use of certain tax breaks could still subject you to the tax. Phase-outs of personal exemptions and the limitation on itemized deductions have been reinstated. As a result, joint filers with adjusted gross income greater than $300,000 and single taxpayers whose adjusted gross income exceeds $250,000 may see a decrease in both of these deductions. After several years of uncertainty in the estate tax area, the American Taxpayer Relief Act (ATRA) of 2012 finally created some permanency. The amount that an heir can inherit without owing estate tax is now set at $5 million and will be indexed for inflation in future years. In addition, the estate tax was raised to 40%. Under the ATRA, taxpayers age 70½ and older can once again make up to $100,000 of tax-free distributions from an IRA directly to qualified charities. 4.

6 IRS Announces 2014 Pension Plan Amounts Five Year-End Tax-Saving Strategies for Small Business 1. Buy a Heavy SUV, Pickup, or Van While buying a big SUV, pickup, or van for your business may not be seen as politically correct because of the gas the vehicles use, the fact is they are useful if you need to haul people, equipment and materials around. They also have major tax advantages. Saving for retirement is critical because it allows you to accumulate wealth for the future and generally provides a tax break. The Internal Revenue Code provides dollar limitations on benefits and contributions of qualified retirement plans. It also requires the IRS to adjust these limits for cost of living increases on an annual basis. The IRS announced the pension plan limitation changes for Some pension limitations remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustments, the IRS explained. However, other limits will increase for The table below shows some of the key amounts. Annual Qualified Plan Limits (k), SARSEP, 403(b) Plan Deferrals $17,500 $17,500 (Section 402(g)) & 457 Plan deferrals (Section 457(b)(2)) 401(k), 403(b), 457 & SARSEP additional $5,500 $5,500 catch-up contributions for employees age 50 and older Defined contribution plan dollar limit on $52,000 $51,000 additions (Section 415(c)(1)(A)) Defined benefit plan limit on benefits $210,000 $205,000 (Section 415(b)(1)(A)) Maximum compensation used to $260,000 $255,000 determine contributions SIMPLE deferrals (Section 408(p)(2)(A)) $12,000 $12,000 SIMPLE additional catch-up contributions $2,500 $2,500 for employees age 50 and older IRAs Traditional and Roth IRA Individual, up to 100% of earned Income Roth and traditional IRA additional annual catch-up contributions for account owners age 50 and older $5,500 $5,500 $1,000 $1,000 Thanks to the Section 179 deduction privilege, you can immediately write off up to $25,000 of the cost of a new or used heavy SUV that is placed in service by the end of your business tax year beginning in 2013 and used over 50% for business. For a heavy long-bed pickup (one with a cargo area that is at least six feet in interior length), the $25,000 Section 179 deduction limit does not apply. Instead, the regular Section 179 deduction limit of up to $500,000 applies, as explained later in this article. The same is true for a heavy van that has no seating behind the driver s seat and no body section protruding more than 30 inches ahead of the leading edge of the windshield. Thanks to the 50% first-year bonus depreciation privilege (more on that later), you can write off half of the business-use portion of the cost of a new (not used) heavy SUV, pickup, or van that is placed in service by December 31, 2013 and used more than 50% for business. After taking advantage of the preceding two breaks, you can follow the regular depreciation rules to deduct whatever is left of the business portion of the vehicle s cost over six years, starting with To cash in on this favorable tax treatment, you must buy a heavy vehicle, one with a manufacturer s gross vehicle weight rating (GVWR) above 6,000 pounds. First-year depreciation deductions for lighter SUVs, light trucks, light vans, and passenger cars, are much less. You can usually find a vehicle s weight rating on a label on the inside edge of the driver side door where the hinges meet the frame. Finally, you can follow the regular depreciation rules to depreciate the remaining cost of $20,000 (the amount left after subtracting the Section 179 deduction and the 50% bonus depreciation deduction), which will generally result in a $4,000 deduction for 2013 (20% times $20,000). Overall, your first-year depreciation write-offs amount to $49,000 ($25,000 plus $20,000 plus $4,000), which represents a whopping 75.4% of the vehicle s cost. In contrast, if you spend the same $65,000 on a new sedan that you use 100% for business between now and year end, your 2013 depreciation write-off will be only $11,

7 2. Take Advantage of $500,000 Section 179 Deduction for New or Used Assets For tax years beginning in 2013, the maximum Section 179 deduction for eligible new or used assets other than heavy SUVs is a much larger $500,000. For instance, the larger $500,000 limit applies to Section 179 deductions for things like new or used machinery and office furniture, computer equipment, and purchased software. Warning: Watch out if your business is expected to have a tax loss for the year (or close) before considering a Section 179 deduction. The reason: You cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Contact your EHTC tax adviser if you think this might be an issue for your operation. 3. Benefit from Bonus Depreciation for Other New Assets Your business can claim 50% first-year bonus depreciation for qualifying new equipment and software that is placed in service by December 31, Used assets do not qualify. There is no business taxable income limitation on bonus depreciation deductions. That means 50% bonus depreciation deductions can be used to create or increase a net operating loss (NOL) for your business s 2013 tax year. You can then carry back the NOL to 2012 and/or 2011 and collect a refund of some or all taxes paid in one or both those years. Contact your EHTC tax adviser for details on the interaction between asset additions and NOLs. Deadline: The December 31 placed-in-service deadline for assets eligible for 50% first-year bonus depreciation applies whether your business tax year is based on the calendar year or not. So time is growing short if you want to take advantage. 4. Take Advantage of $250,000 Section 179 Deduction for Real Estate Improvements Real property improvements have traditionally been ineligible for the Section 179 deduction. However there s a big exception for qualified real property improvements that your business places in service in a tax year that begins in You can claim a firstyear Section 179 deduction of up to $250,000. This temporary break applies to: Interiors of leased non-residential buildings Restaurant buildings Interiors of retail buildings The $250,000 Section 179 allowance for real estate is part of the overall $500,000 allowance, and it will not be available for tax years beginning after 2013 unless Congress extends it. Warning: Once again, watch out if your business is already expected to have a tax loss for the year (or close) before considering any Section 179 deductions. You can t claim a Section 179 write-off that would create or increase an overall business tax loss. Also, claiming Section 179 deductions for real property can trigger high-taxed ordinary income gains when the property is sold. Contact your EHTC tax adviser for details. 5. Juggle Income and Deductible Expenditures if they Go on Your Personal Return If you run your operation as a sole proprietorship, S corporation, LLC, or partnership, your share of the net income generated by the business will be reported on your Form 1040 and taxed at your personal rates. The 2014 individual federal income tax rate brackets will be about the same as this year s (with modest bumps for inflation), so they will remain relatively taxpayer-friendly. Therefore, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. In that case, deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2013 until On the other hand, if your business is healthy, and you expect to be in a significantly higher tax bracket in 2014 (say 35% versus 28%), take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until That way, more income will be taxed at this year s lower rate instead of next year s higher rate. C Corporation: If you run your business as a regular C corporation, the 2014 corporate tax rates are scheduled to be the same as always. 6.

8 EHTC CPAs & Business Consultants 5136 Cascade Rd. SE, Ste 2A, Grand Rapids, MI / Small Business Year-End Tax-Saving Moves, continues... If you expect your corporation to pay the same or lower rate in 2014, postpone income into next year while accelerating deductible expenditures into this year. If you expect the opposite, try to accelerate income into this year while postponing deductible expenditures until next year. How to Do It: Many small businesses use cash-method accounting for tax purposes. If your business is eligible, cash-method accounting gives you flexibility to manage your 2013 and 2014 taxable income to minimize taxes over the two-year period. Here are some specific moves if you expect business income to be taxed at the same or lower rate next year. Before year end, charge recurring expenses that you would otherwise pay early next year on credit cards. You can claim 2013 deductions even though the credit card bills won t be paid until next year. However, this favorable treatment doesn t apply to store revolving charge accounts. Pay expenses with checks and mail them a few days before year end. You can deduct the expenses in the year you mail the checks, even if they won t be cashed or deposited until early next year. For big-ticket expenses, send checks via registered or certified mail. That way, you can prove they were mailed this year. Prepay some expenses for next year. This is allowed as long as the economic benefit from prepaying does not extend beyond the earlier of: 12 months after the first date on which your business realizes the benefit, or the end of the tax year following the year in which the payment is made. For example, you could claim 2013 deductions for prepaying the first three months of next year s office rent or the premium for property insurance for the first half of next year. On the income side, put off sending some invoices so you don t get paid until early next year. The general rule for cash-basis taxpayers is you report income in the year you receive cash or checks in hand or through the mail. Of course, you should never put off sending invoices if it raises the risk of not collecting the money. 7. When Should You Take the Opposite Approach? If you expect to pay a significantly higher tax rate on next year s business income, try to do the opposite of these moves to raise this year s taxable income and lower next year s. Go for a Net Operating Loss With the exception of the Section 179 depreciation deduction, the business tax breaks and strategies discussed here can be used to create or increase a 2013 net operating loss (NOL) if your business s expenses exceed its income. You can then choose to carry a 2013 NOL back for up to two years in order to recover taxes paid in those earlier years. Or you can choose to carry the NOL forward for up to 20 years if you think your business tax rates will go up. Take Advantage of S Corp Built-In Gains Tax Exemption Do you operate a corporation that converted from C to S status a few years ago? You probably know that a corporate-level built-in gains tax (the BIG tax) may apply when certain S corporation assets (including receivables and inventories) are turned into cash or sold within the recognition period. The recognition period is normally the 10-year period that began on the date when the C to S conversion occurred. However, for gains recognized in tax years beginning in 2013, there s an exemption from the BIG tax. It applies if the fifth year of your corporation s recognition period went by before the start of the tax year beginning in If your S corporation is eligible, consider making some asset sales that trigger built-in gains this year (when the BIG tax exemption is available) instead of selling in future years (when the BIG tax might bite). Contact your EHTC tax adviser if you have questions about any of the tax planning strategies described in this newsletter.